Indonesia Embraces Shale Fracking — but at What Cost?

Indonesia’s energy sector lies on the cusp of renaissance as the latest technology — shale fracking — finally arrives in Southeast Asia. Last month, state-owned oil-and-gas firm Pertamina signed its first contract on the exploration of 16 trillion cu. ft. of potential shale-gas reserves in northern Sumatra, and other deals are also pending. But this trend comes not without controversy, and aside from human-rights and environmental issues, there could be significant economic repercussions for the region, especially if local superpower China decides to follow suit.

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Shale fracking has already made huge headlines in the U.S., where it is largely responsible for reversing a long decline in energy production. (Official figures suggest oil-and-gas output has increased by 38% since 2008.) This resurgence led President Barack Obama to boast “we have a supply of natural gas that can last America nearly 100 years” during his January 2012 State of the Union address. The power-guzzling U.S. became a net exporter of gasoline, diesel and other refined products in 2011 — the first time in over half a century — and could potentially overtake Saudi Arabia and Russia to become the world’s largest oil producer in just five years. This new climate of plenty has helped stem a steady rise in prices sustained by diminishing conventional supplies and decades of instability in the Middle East.

Hydraulic fracturing, or fracking, involves drilling down thousands of feet to where petroleum deposits are trapped amid porous rock. Engineers set small explosions that form cracks, and then a mixture of water, sand and chemicals is pumped down to enlarge these fissures. Shale gas, or tight oil, is released and can be harvested at the surface. The beauty of this method is that it makes old spent wells viable again, and the resultant fuel is much cleaner than burning coal. The downside, claim activists, is that dangerous chemicals leak into the water table, poisoning livestock, crops and the general population. Fracking has polarized opinion in the U.S., where campaigns spearheaded by celebrities and community groups point to ecological degradation in key battlegrounds like rural Pennsylvania. Others tout fracking as a game changer that can plug the gap until renewable energy matures into a viable alternative; a report released in April by the Environmental Protection Agency also played down the risks.

Amid this controversy, Indonesia has become the first Southeast Asian nation to fully embrace shale. Oil was originally discovered on the island of Sumatra in 1880 when a 20-year-old Dutch tobacco planter noticed local people setting fire to damp twigs while sheltering from a tropical storm. It turned out that this kindling had been dipped in a strange pool of dark liquid found nearby that was two-thirds kerosene. So began Indonesia’s oil boom that peaked with a national output of around 1.5 million barrels per day during the 1990s. The country was the only Asian member of OPEC until aging fields and a dearth of investment saw its eventual withdrawal in 2009.

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Dwindling supplies from conventional drilling is proving to be a major headache for Indonesia’s government. Southeast Asia’s largest economy also boasts the world’s fourth largest population with a burgeoning middle class to support. The country was in line to spend $31 billion subsidizing fuel this year before a rise in prices was agreed last week. But this move was accompanied by fierce protests and only partly addresses the issue. Exploiting cheap and plentiful shale reserves is therefore very attractive — and not just for Pertamina. Chevron Pacific Indonesia already uses fracking in Duri, Sumatra — the country’s largest oil field — while Australia’s NuEnergy Gas has just begun hydraulic-fracturing operations at five new untested coal beds in West Java, and expects gas sales by the end of the year.

The fear that fracking might pollute water supplies is magnified in Indonesia, where cost cutting, lack of technical expertise and venal local authorities have historically exacerbated industrial dangers. Pius Ginting, of the Indonesian Forum for the Environment, or WALHI, describes the growth of fracking in his country as “alarming” and tells TIME that his group is in the process of conducting impact-assessment visits to affected communities. “Because we do not have community awareness regarding health problems related to fracking shale gas, so far this is still hidden under the carpet,” he says.

Indonesia boasts some of highest levels of biodiversity in the world but has a decidedly mixed record on environmental protection. Last year, experts deemed the national water quality to be the worst in Southeast Asia — only 10% of the rural population has access to clean supplies. Muhammad Reza, advocacy coordinator of People’s Coalition for the Right to Water, or KRuHA, tells TIME that a fracking boom would be a “catastrophe” for Indonesia’s natural resources as well as essential services. Land rights and worker safety are additional concerns; Agung Marsudi, a Duri Institute researcher, warns of “many social and environmental problems” down the line.

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Aside from environmental concerns, experts say certain challenges, like restrictive legislation, must also be overcome for Indonesia to fully realize its potential. The state currently has right of first refusal on all domestically produced fuel at tightly controlled rates. “Price can make or destroy both supply and demand,” says Alan Troner, president of Asia Pacific Energy Consulting. Troner admits that a U.S.-style fracking boom is possible in Indonesia, but says that “it’s not going to be easy, it’s not going to be cheap, and it’s not going to be tomorrow.” Challenges such as poor local governance, a lack of financial incentives for investors and inadequate infrastructure must also be addressed.

China is also seeking to embrace fracking, and some experts believe it may host the world’s largest shale-gas fields. Beijing’s 12th five-year plan includes provisions to increase shale-gas production to 350 billion cu. ft. by 2020. State-financed oil firms have been enlarging their stakes in North American energy companies including Devon Energy Corp., one of the pioneers of the shale-gas revolution, which allows crucial expertise to be garnered. “China has big plans to harness shale gas by fracking,” explains Subbu Bettadapura, a Kuala Lumpur–based energy expert for American consultancy firm Frost & Sullivan, adding that the country is aware of problems such as water scarcity, air pollution and lack of technology.

China replacing traditional coal-fired power plants with shale gas would likely help improve local air quality, though the Middle Kingdom’s already tainted water supply could well feel the brunt. But there are other economic consequences for nearby emerging economies that have bet future prosperity on feeding China’s ever expanding energy needs. A large-scale regional fracking boom may also drive global fuel prices down and make traditional exploration less economically viable. A recent report by PricewaterhouseCoopers suggests fracking could keep oil prices 40% lower than previously expected levels by 2035.

While fracking is a major advantage for countries with established drilling mechanisms looking to maximize spent fields — such as China, Indonesia and Malaysia — there are few benefits for those with nascent industries. Burma, Vietnam, Cambodia and the Philippines have long vaunted large stocks of oil and gas, yet to date have made very little substantive progress tapping their resources. These developing economies therefore have a definite interest in keeping global oil prices high, especially if they seek to attract foreign investment to exploit these reserves. With shale exploration promising to revolutionize the global energy market, there are likely to be both winners and losers within Southeast Asia, and all eyes will be on Indonesia for an indication of what lies ahead.

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